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Stocks point to Bush loss?
If history is any guide, Bush needs a summer rally -- but history may not be such a great guide.
June 23, 2004: 4:55 PM EDT
By Mark Gongloff, CNN/Money senior writer

NEW YORK (CNN/Money) - Past performance is not a reliable indicator of future returns. That's good news for President Bush, because if past stock-market patterns hold true this year, he will lose his bid for re-election in November.

Presidential elections are usually won by the incumbent party; in the past 104 years, in 26 elections, the party holding the White House has lost it only 10 times.

But those incumbent losses have been heralded every time by poor stock-market performance, either in the four years leading up to the election or in the last year before the election, according to recent research by Ken Tower, chief market strategist at CyberTrader, a unit of Charles Schwab (SCH: Research, Estimates).

Tower's analysis found that, in six out of those 10 losses, the Dow Jones industrial average gained less than 20 percent in the four years leading up to election. In comparison, in the 16 elections won by the incumbent party, the Dow posted an average four-year gain of 49 percent.

While six out of 10 is not statistically significant, the other four elections that resulted in incumbent-party losses saw poor stock returns in the one year leading up to the election.

It's worth noting that Tower didn't say what he meant by "poor" one-year returns.

Three of those returns have been positive, the best being the 5 percent gain in the year leading up to the losing re-election bid of the first President Bush. But all were far less than 10 percent, which some investors might consider a reasonable expected annual return in the stock market.

In any event, President Bush and the Republicans would seem to have both trends working against them. The Dow is down some 5 percent since election day 2000, and it's gained only 5 percent since the first Tuesday of November 2003 -- not a performance strong enough to guarantee a re-election, if history is any guide.

In fact, Tower said, of sitting presidents, only Franklin D. Roosevelt has been re-elected, in 1936 and 1940, after a worse stock market performance than Bush has suffered.

"It would seem that the Republicans desperately need a summer rally to bolster their chances," Tower wrote.

Still, it seems unlikely that the stock market's performance alone would be a good predictor of the election's results. For one thing, the Dow surged some 43 percent between March 2003 and February 2004. A cool-down leading up to the election is only natural, and wouldn't mean the end of the world for investors, as long as they can hold on to their earlier strong gains.

Stocks, in fact, can respond negatively when good things happen to regular people. Higher wages, for example, can hurt corporate profits, keeping a lid on stocks.

"As the rate of gain in corporate profits slows, even though the economy is booming, productivity is slowing and wages are going up, so the market will feel worse -- but people will be feeling better," said Leslie Alperstein, political economist and president of Washington Analysis, an independent research firm formerly connected to investment bank HSBC.

George W. Bush
Stock Research

"The stock market might be a variable, but I think it's totally trumped by other factors right now," Alperstein added.

Alperstein believes Bush may be in trouble in November, but that has little to do with the stock market. Wage growth has been slow since the 2001 recession, while prices for food and energy have lately skyrocketed. Many voters are only vaguely aware of the stock market's health at any given time, but they are constantly aware of their wages and what they have to pay for gallons of milk and gasoline.

Perhaps for these reasons, consumers continue to say they're less than thrilled about the economy, even as economic statistics improve -- a situation with a recent, personally significant parallel for Bush.

"It's a fact that these perceptions lag reality -- it's not terribly uncommon for the economy to be doing better and better when you get to election day, but people feel the economy's in a funk," Alperstein said. "The latest example of that was Bush's father," who lost his 1992 bid for re-election amid economic worries, even as job growth accelerated.

On that front, there has lately been good news for the president -- the University of Michigan's consumer sentiment index rose in June, and the latest weekly ABC/Money consumer comfort index also rose from a very low level, led by improving confidence among Republicans and some independents.

"While the overall [ABC/Money] index lacks momentum, the electoral picture is turning more favorable for President Bush," Edward Yardeni, chief investment strategist at Prudential Financial, wrote in a note to clients on Wednesday.  Top of page

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